What are Co-Located BESS PPAs?
Co-located BESS PPA refers to PPAs that are executed for renewable energy assets (either onshore wind or solar) that include a co-located Battery Energy Storage Solution (BESS).
To calculate reference PPA prices for co-located energy projects, the fair PPA price is deducted by the co-located Market Price of Risk:
Co-located PPA Price = Co-located PPA Fair Price – Co-located PPA Market Price of Risk.
This is the same approach taken for calculating reference PPA prices for standalone Solar or Wind PPAs.
What is ‘Market Price of Risk’?
‘Market Price of Risk’ is the price discount applied to the fair PPA price, to compensate against risks such as price and profile risk, that cannot be hedged. These hedging risks are born typically by Utilities rather than Corporates. Therefore, from a simplified perspective, the Market Price of Risk can be seen as the difference between a utility bid and the maximum bid that a corporate should be ready to pay.
You can learn more about ‘Market price of risk’ here: What are PPA Prices shown on PexaQuote and the Market Price of Risk? | Pexapark User Manual
Co-located PPA Fair Price
Based on monthly forward prices pi, monthly volumes Vi of the co-located renewable asset and the associated capture factors chybi, the fair co-located PPA price is given by the following formula:
Where the numerator expresses the expected value of deliveries over the entire tenor of the PPA and the denominator expresses the expected total volume to be delivered by the PPA. All assumptions are the same as for the calculations of Co-located BESS plus PV/Wind Capture Factors (please refer to Section "How are Capture Factors calculated?" for the details) with the exception of degradation, which is assumed to be 0.004% per cycle.
Co-location PPA Market Price of Risk
For the considered co-located project, the estimated Market Price of Risk is different from the corresponding stand alone wind or solar PPA due to the following points:
The co-located project has a higher fair PPA price than a stand-alone wind or solar PPA, due to the co-located BESS asset improving the project’s expected capture factors. However, considering the same level of uncertainty remains for elements such as production volumes and prices, the value of the co-located project is expected to vary more widely than a non-co-located energy storage PPA would. This therefore translates into a higher risk in EUR/MWh.
The common hedging technique among off-takers involves not only hedging the volumetric position of an asset but also its value relative to the baseload, known as value-based hedging. Since co-located projects are expected to have a higher market value than those without energy storage, more volumes must be sold to protect against price drops. This leads to increased transaction costs, further raising the Market Price of Risk.
A key point to note is that while the estimated Market Price of Risk for the co-located project is higher than that of a single asset wind or solar PPA, the ratio of Market Price of Risk to the fair PPA price is lower in the co-located case. This indicates that the storage asset can help reduce some underlying risks.
Price Uplift
The price uplift is defined as the improvement of the PPA bid price for the co-located project compared to the PPA bid price for the corresponding single asset wind or solar PPA. The Price Uplift can be thought of as the premium a co-located project can achieve from the market for a certain type of PPA.